This 2025 change in the law will remove an important barrier to pension savings for part-time workers

Saving for retirement is a challenge for many employees, including those with permanent, full-time employment. But part-time workers face unique challenges. Because they typically earn less income than full-time workers, they have less money available to save for their future. In some cases, they may have nothing left after paying their monthly bills.

Even those who manage to free up some extra cash are often limited in where they can keep it. But a new rule change taking effect in 2025 will make this second problem a little easier to overcome.

Image source: Getty Images.

More part-time workers are eligible to participate in 401(k)s

Under current legislation, employers can impose restrictions 401(k) plan are only eligible for employees who meet one of two criteria: either they work for the company for one year completing at least 1,000 hours of service, or they work for the company for three years completing at least 500 hours of service in each year. So some part-time workers may already be eligible for their employer’s 401(k) plan.

But from 2025, the three-year military service for part-time workers will drop to two years. You must still work at least 500 hours per year. Service performed before 2021 will not count in determining eligibility. Collectively negotiated plans also do not have to comply with this rule change. However, 403(b) plans must adhere to the new rules, just like 401(k)s.

This may not change much for some part-time workers. If you don’t have enough income in any account to save for retirement, accessing a 401(k) won’t improve your situation. However, it can be beneficial for those who can save a little, especially if the plan offers an employer contribution.

The rule change could also be valuable for those paying off student loan debt if their employer’s 401(k) has a provision that allows the company to make matching contributions to the employee’s retirement account when the employee makes eligible payments for student loans. This 401(k) rule change went into effect in 2024, so there are likely many companies that don’t offer this option. But it may increase in popularity over time.

Alternative Retirement Accounts You Can Use

If you don’t have access to a 401(k) or you don’t think your employer’s 401(k) is right for you, you have some other options:

IRA

You can have one IRA on your own and contribute money if you are able. You can set aside a maximum of €7,000 here in 2024 if you are younger than 50, or €8,000 if you are 50 or older. These limits will remain the same in 2025.

IRAs don’t offer employer matches, but they give you a lot of freedom to invest how you want. You can also choose whether to defer taxes until retirement with a traditional IRA or pay taxes in advance with one Roth IRA so that you can enjoy tax-free benefits after retirement.

An IRA is also a good option for married couples because one partner can contribute to their spouse’s IRA, as long as that partner has earned enough during the year to cover all contributions to both spouses’ retirement accounts. This is known as a spouse IRA and it could help the part-time spouse build his retirement savings even if his income isn’t enough to self-fund his IRA.

Health Savings Account (HSA)

Health Savings Accounts (HSAs) are designed to hold medical savings, but they also serve for retirement savings. To contribute to this, you must have a health insurance plan with a deductible of at least $1,600 for individuals or $3,200 for families in 2024. These limits will increase to $1,650 and $3,300, respectively, by 2025.

If you qualify, you can save up to $4,150 if you have a qualifying individual plan in 2024, while those on a qualifying family plan can save up to $8,300. In 2025, these limits will increase to $4,300 and $8,550 respectively. Adults age 55 and older can add $1,000 to these limits in either year.

HSA contributions reduce your taxable income, just like traditional IRA or 401(k) contributions. Medical withdrawals are also tax-free at any age. But the real benefit for retirement savers is that you can make non-medical withdrawals without paying the 20% penalty once you turn 65. However, you will still owe income tax on these withdrawals.

You don’t have to limit yourself to one plan either. You can use your 401(k) until you claim an available matching contribution and then roll over to an IRA. Or divide your savings between an IRA and HSA as you wish. However, it’s best to have a strategy in mind. Think about where the money will do you the most good and be prepared to execute your plan as we move into 2025.